spread forward - risk factor

any guru knows how the risk factor is determined? the text doesn’t explain it at all and just throws out a formula… i.e. risk factor of 4.3 - what exactly does this mean?

risk factor will be given.

It usually comes about after a psychological profile test that rates the investors risk aversion from say 1 to 10 or from low to high. The higher the number the more risk averse…you won’t have to know how to arrive at this number, as Striker stated it will be given.

I saw a question in one of the sample exam where the answer referred to convexity and duration as the the determining factor in arriving at this number. I dont know what it means but I am repeating the answer for what it is worth…may be some one else could explain it a bit further.

Krishna1 you might be referrign to a different type of Risk factor…I believe Ryanunsw was referrign to the risk factor that is used in this formula: E® - Variance * .005 * Risk Factor

I think ryanunsw and krishna1 are talking about credit deriviatives, and bigwilly about risk aversion when calculating expected utility

Whoops :slight_smile: REGARDLESS they will provide this risk factor… They need to come up with more names…